Over the past month we have seen some quite catastrophic news for the oil market, however despite the news flow prices have continued to climb.

The major news event was the complete breakdown of the Doha talks between Saudi Arabia, Russia and other key OPEC players.

The aim of the talks were to agree an output freeze which would allow the market to recover quicker, these talk however broke down once the Saudi’s insisted that Iran take part in the freeze.

Oil prices dropped dramatically after the Doha meeting reaching $37 a barrel, but the following day news of a strike in the Kuwait oil industry sent prices back up.

Another shock came earlier in the month when the Russians released their output figures showing that they had managed to increase production some 200,000 barrels per day (bpd) despite western sanctions and low prices.

US production has now dropped some 700,000 bpd and this has gone some way to reduce the oil glut but it is nowhere near sufficient to remove the roughly 2 million barrels a day of oversupply in the market.

To further add to these woes it now seems that the Chinese may be close to filling their strategic reserve. Filling these reserves has seen the Chinese government purchasing up to 1 million bpd over the past few months, however this may be coming to an end soon. Also with prices in the mid $40’s many shale producers may begin fracking wells that were previously drilled but left to stand when prices were lower.

So why has the price of oil not dropped? Principally the reason is that while there is a glut of supply in the oil market there is no strategic reserve anymore. Previously the Saudis held back from pumping their full capacity which meant that when events knocked out other suppliers they could compensate. Over the past few months we have seen pipeline failures in Iraq and Nigeria, a strike in Kuwait and now wild fires in Canada that have all lead to major production disruptions.

In addition we have seen a massive increase in speculation on commodities markets, especially in China where the asset bubble from the stock market and property market has begun to flow into the commodities market, in an attempt to sidestep the governments cooling measures.

However as these issues dissipate it is likely that oil will experience fresh drops into the mid 30’s over the coming weeks.